You’ve worked your entire life to build a family business, and now it’s time to pass it on. But how and when you sell the family-owned business can determine what you owe. The following strategies will help you minimize the amount of money you’ll owe to the Internal Revenue Service (IRS).

Sell your business

One way to avoid gift or estate taxes on your business is to sell it outright to your beneficiaries. The benefit is that you can use the money to help support your lifestyle in your golden years and then leave what’s left to the very beneficiaries that bought your business.

The only caveat is that you must sell your business for fair market value. If you low-ball the price, you might have to pay a gift or estate tax. A sale will trigger a capital gains tax of 37.1% which needs careful planning to minimize.

Plan ahead to sell your business

Planning ahead to sell your business allows you to take affirmative action to improve the value of that business and increase the sale price. Consider hiring a consultant to assist you with improving the value of that business. When you sell your house, the realtor "improves" the appearance to improve the bottom line. The same can be done for your business, but time is needed to effectuate that. 

In California, the maximum capital gain tax rate is 37.1%. See your tax attorney as early as possible for the sale of a highly appreciated asset. Lead time provides a wider range of tools for your advisor to use to minimize the capital gains tax. For example, a lead time in excess of two (2) years allows a family to defer the capital gain for thirty (30) years by utilizing the two (2) year installment sale. There are many other alternatives to consider, some of which have a charitable component. The best charitable tools provide a win/win result with greater economic value to the seller and/or his family and providing for a charitable cause that the seller chooses. The focus is on the client goals first in order to identify the best tool to utilize for tax savings. 

Gifting Business Interests

As soon as you’re ready to begin transferring your business to your beneficiaries, consider to make annual gifts of a portion of the business that doesn’t exceed the annual gift tax threshold of $14,000.  By doing this systematically, you can transfer a significant part of your business without having to pay the IRS. This can be complicated if not all of the family members work in and are involved in the family business. Often the family business represents the single highest value in the estate. Passive family members may be troublesome as they often view the value of the business as being centered on the capital or assets. Passive family members may not appreciate the hard work of the family members working in the business and may object to salary or compensation amounts. 

Of course, you’ll have to live a long time to fully transfer your business this way, especially if the business is worth a lot of money. But, if you’re transferring a relatively small family business to several beneficiaries, this method could save you a lot of money in gift taxes.

Take advantages of estate tax provisions

Section 6166 of the Internal Revenue Code lets you defer for 5 years estate taxes due on a closely held business that’s included in your estate. For years 1–4, you only have to pay interest on money due, and then you owe the principal plus interest on year 5. Plus, you get up to 10 years to pay annual installments on estate taxes due.

The advantage to this approach is that your heirs have time to raise or borrow the money to pay estate taxes without having to sell the business you left to them. If you take this route, however, you need to know some important details, so be sure to consult with a professional.

This is just the beginning of what can be a complex process. We can help you simplify it. Call today if you have questions about transferring your business to beneficiaries. We’ll help you craft a plan that will minimize taxes and other financial headaches.

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